The seasonal weak 1Q17 is not alarming as an expected strong 2H17 will bridge up the shortfall, catapulting FY17 earnings a new high. On the other hand, it will continue to enjoy low taxation due to the tax-exempt status awarded to DPL EPC portion will help to improve bottom line. We maintain our OUTPERFORM rating with price target of RM2.00/SoP share, for its explosive earnings growth story led by the exciting Indochina power infrastructure spending.

1Q17 within expectations. At 8%/9% of house/street’s FY17 estimates, 1Q17 core profit of RM6.4m came in line with forecasts as traditionally the 1Q or rather 1H are weak period given that it is raining season in Cambodia, which normally affects work progress badly. There was no dividend declared in 1Q17 as dividends are usually paid every half-yearly.

A traditionally weak quarter. On the surface, 1Q17 core earnings plunged 79% sequentially to RM6.4m from RM31.0m in the preceding quarter as revenue contracted 46% to RM102.8m from RM190.7m previously. The decline in revenue and earnings were primarily due to the raining season in Cambodia, which affected its work progress there. In addition, most of the work claims recognition was from Diamond Power (DPL) while claim for Alex Corp project was lower pending a potential job upgrade request by the client. Back home, most of the local projects were at early construction stage.

However, better results than last year. With revenue more than doubled to RM102.8m from RM48.3m, PESTECH booked in a core profit of RM6.4m in 1Q17 from core loss of RM0.7m in 1Q16. This was largely attributable to the start of DPL in 2Q16, which was reflected in revenue and hence bottom line. In addition, the effective tax rate in 1Q17 was 4% as opposed to 23% in 1Q16 as earnings from DPL was tax exempt.

Outlook remains upbeat. Although 1Q17 results were slow given the seasonality effect, we expect a better 2Q17 before a strong 2H17, as work progress will back in full swing in the dry season in Cambodia, to end FY17 at a new high again. Meanwhile, its order book improved to RM1.04b as of end-Sep from RM840m three months ago after securing four contracts in the past four months. With its aim to secure at least three projects in the near term: one local rail electrification project and two Cambodian projects of which it stands a high chance of securing, order book is expected to increase further.

Maintain OUTPERFORM. We keep our estimates unchanged for now as the expected strong 2H17 will fill up the shortfall in the 1Q17. We continue to rate the stock OUTPERFORM for its explosive earnings growth story with unchanged price target of RM2.00/SoP share. Risks to our call include failure to replenish order book and cost over-runs.

Source: Kenanga Research - 30 Nov 2016